Easing of global raw material prices to aid Sheela Foam's margins

The stock of Sleepwell mattress maker has gained 28 per cent over the last month

Lifting of “Force Majeure” by large global manufacturers of TDI (Toluene Diisocyanate) is seen as a key positive for Sheela Foam, maker of the Sleepwell brand of mattresses. 

TDI prices have corrected nearly 30 per cent from their peak in September following the resumption and steady ramp up of Covestro and BASF’s TDI plants in Germany. TDI is a key raw material for manufacturing polyurethane (PU) foams that are used in mattresses, furniture and automobile seat covers. TDI along with polyol accounts for approx. 73 per cent of the total raw material cost for Sheela Foam. And therefore, lower input costs is seen boosting the company’s margins, according to analysts.

On Aug 31, German chemical giant BASF declared force majeure at its 300,000 metric tonne per annum TDI plant in Germany after experiencing technical problems. Additionally, Covestro – a leading global supplier of TDI declared force majeure in mid-October following the failure of a central pump at its 270,000 metric tonnes per annum TDI plant in Dormagen, Germany. This further exacerbated the supply chain disruption caused by the spread of coronavirus pandemic as prices increased close to 90 per cent between March and September. Subsequently, the company’s gross margins declined 120 basis points in the July to September quarter. 

The Street is also optimistic of a sustained demand growth. The company’s revenues grew 22 percent year-on-year in the second quarter aided by strong growth in the domestic branded mattress, furniture cushioning and foam cores businesses. “Sheela Foam is expected to do well on the back of strong festival buying for branded mattresses in the Q3 of FY21 plus it stands to benefit also on the raw material front with TDI prices seen turning soft in the near term as global supply issues ease out,” said Avinash Gorakshakar, Director – Research, Profitmart Securities. 

Shares of Sheela Foam are up more than 28 per cent in the last one month as compared to 16 per cent gain recorded by the Nifty Smallcap 100 index during the same period. The stock is now 3 per cent away from its 52-week high of Rs 1,671.50.